A lack of affordable homes for sale is causing the number of home sales to drop drastically to 3,900 in the month ending May 21.
Although the number of home deals in the second month of the Iranian year is normally higher than in the preceding month (March 21-April 20), they were 65.2% fewer compared with the same period of last year.
Amin Zargar-Moradi, a housing expert, explains five reasons behind this significant decline in home deals in a write-up for the Persian-language economic daily Donya-e Eqtesad:
1. Home prices witnessed intense growth over the past three years, which has been higher than the average consumer inflation rate. The price-to-rent ratio, which is often used to measure the divergence of housing prices from their equilibrium level and is the ratio of home prices to annualized rent in a given location, is used as a benchmark for estimating whether it is cheaper to rent or own property. As a general rule, a lower price-to-rent ratio means conditions are more favorable for buying a home whereas a higher price-to-rent ratio means conditions are better for renting. The specific thresholds of price-to-rent index are as follows: a price-to-rent ratio of 1 to 15 indicates that buying is more favorable, a ratio of 16 to 20 indicates that renting is typically more favorable and a ratio of 21 or more indicates that renting is more favorable. It has been quite some time that the price-to-rent ratio hovers at levels higher than 30 in Tehran.
2. Average prices of homes in Tehran in dollar terms have exceeded the unprecedented level of $1,200 per square meter. The figure normally stood at lower levels.
3. Other markets have not shown exuberance either in the current year. Iran’s capital market, which saw a sharp increase at the beginning of the last year, began to shed value in the fall and continues to plummet to lows not seen before. Gold and foreign currency markets have been on the decline for two months now. Near the end of their terms, governments are usually inclined to deliver an economy with lower foreign currency exchange rates to their successors.
4. Low inflationary expectations could be another reason behind the decline or stability of home prices. With an eye on nuclear talks in Austrian capital, Vienna, and the probability of the release of Iran’s assets as well the upcoming presidential election on June 18, the housing market is awaiting a trigger such as a decline in investment risks in Iran and a surge in domestic and foreign investors’ appeal or greater credit availability.
5. Effective demand in real-estate market — housing demand that occurs when purchasers are constrained in a different market. It contrasts with notional demand, which occurs when purchasers are not constrained in any other market, has dropped dramatically. On the one hand, the purchaser that used to strike home deals with the aim of making a profit is giving the market a miss due to lack of prospects of a jump in prices in the near future. On the other hand, buyers can’t afford to buy a home due to soaring prices in recent years. Housing affordability index has settled at crisis levels over the past few years. The number of people who don’t have access to decent housing is high, but they can't afford a better place. Home loans are too meager; they cover a very small proportion of the home price.
The aforementioned five reasons are some of the main factors contributing to the decline in home prices. But the question is: Will home prices continue to fall?
Decline in nominal home prices usually occur after a period of rise, but the decline is usually insignificant. Home prices enter a phase of readjustment and stability after experiencing sharp increases, but these price falls are insignificant compared with levels they were before the wave of price increases hit.
The decline in net profit margin of real-estate development of recent years has driven up the economic risks of production, including the price increase of homes and building materials.
The country is facing a supply crisis. Annual demand for housing stands at more than 800,000 units but production hardly reaches 300,000 units. The pent-up demand of previous years should be taken into consideration as well.
By and large, a dramatic fall in home prices is highly unlikely while single-digit readjustment of prices is typical after a sharp price hike.
